Berkshire Hathaway. I ve always heard of it as a jewel and now i want to understand whether or not this classification is fair according to my standards.
Page 1 of the 2015 Annual Report:
Berkshire s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of
both our Class A and Class B stock by 6.4%. Over the last 51 years (that is, since present management took over),
per-share book value has grown from $19 to $155,501, a rate of 19.2% compounded annually.*
And a little bit later:
We ve had experience with both outcomes: I ve made some dumb purchases, and the amount I paid for the
economic goodwill of those companies was later written off, a move that reduced Berkshire s book value. We ve
also had some winners a few of them very big but have not written those up by a penny.
Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap
between intrinsic value and book value. Today, the large and growing unrecorded gains at our winners make it
clear that Berkshire s intrinsic value far exceeds its book value. That s why we would be delighted to repurchase
our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully
increase per-share intrinsic value for Berkshire s continuing shareholders.
Ok, If this is not clear enough i m going to try to explain. Basically, Buffett is saying this: I ve made purchases, some of them have not been succesful. For every winner, i didn t record positive goodwill in the balance sheet (which is an asset, basically the difference between purchase price and book value of the purchased), but i recognized a loss whenever i had to write the goodwill off the balance sheet. Despite this, i managed to make my book value of 19% compounded for the last 51 year.
This was the first pages of the chairman letter. Now I would like to go into details about what Berkshire Hathaway does and how it does.
Many think that BH is just an holding with no proprietary core business, which owns shares of other companies and collects dividends every year. This is not true. BH owns:
- BNSF Railway, which accounts for 17% of America s intecity freight in terms of revenues (ton-miles). Last year (2015) revenues are $40B, 1/5th of the BH total revenues with a pretax income of $6.8B.
- Berkshire Hathaway, two months ago, purchased Precision Castparts Corp for $32B cash. In BH 10-k filing: PCC has become the world s premier supplier of aerospace components (most of them destined to be original equipment, though spares are important to the company as well) . Too early to judge results but PCC reported in 2014 revenues for $9.6B and a net income of $1.7B with a working base of 30,466 units. Not a bad acquisition. Looking forward to see and admire the results.
- Berkshire Hathaway Insurance & GEICO: insurance divisions which contribute for $40B in the insurance division, and GEICO reports astonishing results every year.
These companies are owned entirely by BH, to not count the many holdings. Just for illustration purposes:
Shares Company % owned Cost (M) Market (M) 151,610,700 American Express Company 15.6 USD 1,287 USD 10,545 819% 46,577,138 AT&T 0.8 USD 1,283 USD 1,603 125% 7,463,157 Charter Communications, Inc 6.6 USD 1,202 USD 1,367 114% 400,000,000 The Coca-Cola Company 9.3 USD 1,299 USD 17,184 1323% 18,513,482 DaVita HealthCare Partners Inc 8.8 USD 843 USD 1,291 153% 22,164,450 Deere & Company 7 USD 1,773 USD 1,690 95% 11,390,582 The Goldman Sachs Group, Inc. 2.7 USD 654 USD 2,053 314% 81,033,450 International Business Machines Corp. 8.4 USD 13,791 USD 11,152 81% 24,669,778 Moody s Corporation 12.6 USD 248 USD 2,475 998% 55,384,926 Phillips 66 10.5 USD 4,357 USD 4,530 104% 52,477,678 The Procter & Gamble Company 1.9 USD 336 USD 4,683 1394% 22,169,930 Sanofi 1.7 USD 1,701 USD 1,896 111% 101,859,335 U.S. Bancorp 5.8 USD 3,239 USD 4,346 134% 63,507,544 Wal-Mart Stores, Inc. 2 USD 3,593 USD 3,893 108% 500,000,000 Wells Fargo & Company 9.8 USD 12,730 USD 27,180 214% Others USD 10,276 USD 16,450 160% USD 58,612 USD 112,338 192%
Below there s a little clause:
Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8 billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment and one we value highly. PEANUTS!
Ok, BH owns a relevant stake of the all quoted companies. What does that mean? Means Dividends. Means capital gains. Means a low variability in earnings with a predictable increasing path (not realizing capital gains is a huge advantage if you can afford that). Coca cola investiment is giving back 1300% and he didn t pay a penny of capital gain taxes on it. Probably dividend/year is higher than the price of a whole share Buffet paid in the early 50s. Do you see the potential of such things?
Let s go straight to the facts now. We are not analyzing a manufacturing company, so my valuation will rely on some different ratios and what for me is important to see in such a company. This is a holding, so in order to produce dividends/accumulate capital it has to get inflows every year. Revenues and gross profit are a reliable measure of what i can expect from this.
Can you see what i see? Revenues going up at 10% CAGR since 2011. Well, it is impressive, really. Revenue growth is followed by a COGS growing at 8% CAGR. Components to me are ininfluent, with higher D&A expense that could be given by higher investments in the railway sector or in PP&E (property, plant & equipment). Honestly I don t care that much to investigate further. What i see is anyway a growing Gross Income. Of course we have to consider that 2011/2012/2013 has been great for stocks, and for US economy. Most BH holdings come from there and so we explain a part of the positive results. Interest expense, which i look at in these companies, is not high, with 3.5B this year and 3B as a mean of the last 5 years. I expect this data to be worse in the future due to the rising interest rates. Two things to note on the BS side. Cash, higher than ever with $74B, almost doubled from 2011. Be careful companies out there, someone ight buy 2/5% of you all of a sudden! Debt, with $75.48B also this is really high, in constant growth in the last 5 years starting from $58B. You know guys, i do like this. Would be helpful to know what kind of debt is this. Is it fixed or floating? Which is its duration? Is this high because in the last year Buffet called the banks and opened a $200 M loan every day because of extremely low rates? If this is what happened be sure that that will be a boost to income. Would be a great move. You pay interest in the first years because you just park that money, but when Interest rates go up you invest for higher rates.
Ok, at this point usually i would talk about cashflows. In this case i don t. Why? Because there s no need to pay dividends. You just need to have a cashflow capable of financing operations and investing/financing activities and you re good. FCF is 15B. Where are all these money going? Bank or shares. That s beautiful.
- Price: 209$
- P/E 14x: not much. Maximum of the last year has been 19x
- P/BV: 1.33x. Minimum has been 1.19x and commitment of company to buy shares at that price had effects. If i had liquidity in January i would have bought a lot of these shares at that price.
- Interest Coverage: 9x. More would probably mean a non efficient allocation of debt. Or not enough debt.
Why is BH trading so low in terms of multiples right now? Well, it s a mixture of things. But i would explain 70% of it with the classical irrational investor. Core business is insurance, and insurance companies margins are negatively correlated with interest rates.
What i think is a good price for BH? Well, this is a good price. BH traded on an average of 1.58x Book Value. Right now we are at 1.33x so we are getting a discount on this stock compared to the price that would have been historical for constant BV 1.58*160 = 252.8$. Right now the discount is 17% more or less.
Follow me on this: If price can t go lower than 1.20 in p/bv, and bv/s can only increase, means that at 1.2 we are going to get the best quotation ever. And 1.33 is not far from 1.2 .. What do you think of this company?
A European research project dubbed Pro E-bike has concluded that global logistics businesses could achieve huge cost and Co2 savings in almost every case if they switched to e-cargo bikes for deliveries in urban areas. The project has even launched a tool to assess your own business.
Established under the Intelligent Energy Europe programme, the project tested the use of pedelecs, electric cargo bicycles and tricycles, and electric scooters, for a range of delivery services. It included 40 businesses, in different industrial sectors and of different sizes, in seven European countries and 20 cities. Following the conclusion of the trials, the majority of those public and private sector companies involved in the experiment opted to retain their e-bike delivery fleet, with some participants completely restructuring their logistics. In three of the seven member states 100% continued with e-bike delivery. At the start of the trials, 79 e-bikes of various types were used by the firms taking part. That number is now 267 and growing. For example, in Milan a city which may be about to pay cyclists in order to cut pollution during the ten month trial Italy s second largest mail firm delivered almost 50,000 letters and parcels, covering more than 20,000 kilometers using just pedal-assist bikes. That workload would otherwise have required three vans.
The mail firm has now moved its logistics centre to a new location and replaced 3 vans with 6 e-bikes, with a resulting increased delivery productivity. Even though more people were employed to do the same work the firm still saved money. Cost savings included an 85% reduction in energy costs and the saving of Milan s congestion charge. This means that environmental and social benefits for the community and marketing gains for the company are effectively free. GLS estimates that the e-fleet saves around 90 tonnes of CO2 per annum. Over in Valencia, Spain, parcel firm Encicle s findings echoed those in Italy. The company trialled a Garbicicle electric cargo tricycle, with a load capacity equivalent to 10 standard e-bikes or one van. In one month the trike covered 3,081 km and effectively replaced one conventional van.
Postal aside, the scheme also assessed service company viability, including waste collection, water meter reading, social and home care, as well as passenger transport ranging childcare and intercity business meetings. Meanwhile in Croatia, Hrvatska Po ta is the Croatian national postal service and elected to trial two models of e-bike for daily rounds. The outcomes were analysed in terms of CO2 emissions reduction, operational savings and the reaction of postal workers. On all three counts the company was impressed, opting to commit before the end of the trial to acquire a fleet of 180 electric bikes to replace its scooters. A nationwide roll out occurred last year. The annual savings per vehicle are around ‘ 920. After the replacement of all 180 motor scooters with e-bikes, it is estimated that the overall cost savings will be approximately 85%, while CO2 emissions will be lower by 100 tonnes annually.
The study pointed to pedelecs as the best all round option in the short term, being the cheapest to invest in. However, these will offer less capacity than e-cargo and e-scooters. An e-cargobike offers similar load capacity to an e-scooter (160 litres), a speed of 25 km/h (which is of course adequate for most urban uses) and good autonomy, with a range around 70 km. In general, e-scooters have the largest carrying capacity (150 180 litres load space), maximum up to 80 km/h. However, their cost is two to three times that of a pedelec and double the cost of e-cargobikes.
A key differential between the territories anaylsed was the landscape. In cities such as hilly Lisbon, the potential was restricted by the batteries capacity when deliveries were on the outskirts of the city. Similarly, Cista narava, a business owned by Moravske Toplice municipality in Slovenia and located in a rural setting, found e-bikes are very good for activities such as local waste collection, small-scale road repairs and reading water supply meters, but could not demonstrate a cost saving. When it comes to distribution, the map above shows how couriers can avoid enterring urban areas with motor vehicles with the addition of perimeter distribution centres. This is particularly pertinent in cities with a congestion charge in place, but also shows how a bike s agility has several key advantages in built up areas.
The study concludes: One of the main lessons learned is that entrepreneurs, stakeholders, public authorities and policy makers should work together from the beginning, to coordinate their work and ensure measures are suited to local contexts and culture. This is how they can maximise the benefits.
PRO-E-BIKE has demonstrated that cycle logistics forms an integral part of city mobility. It should be an automatic element in policies and strategies not only for mobility, but also for urban planning, energy and environment. The potential for cycle logistics is signifi cant, our project has demonstrated that it can be successfully introduced, and now is the moment for cities across Europe to follow this lead. Pro-E-Bike s simulation tool will now allow any business to calculate the cost and environmental savings. This is available in 8 versions (English, Croatian, Dutch, Italian, Portuguese, Slovenian, Spanish and Swedish), each with relevant local content and values. Read some more statistics below, or catch the full report here.
After a pilot with 33 bikes in 14 Dutch cities, which showed cost savings of over ‘ 13,000 per bike and a reduction in motor vehicle mileage, DHL Express began to roll out its cycle delivery system, which by 2014 was working in 9 European countries. DHL s European fleet now includes over 26,000 bikes, of which 9,000 are electric bikes or trikes. The French La Post fleet counts 20,000 ebikes, expanding by 2017 to 30,000.
Electric cargo bikes could take 19% 48% by distance of courier logistics now done by motor vehicles. Sales of e-bikes in the EU have been on a strong rising trend over the past decade, from almost 100,000 in 2006 to 1.1 million by 2014. The main growth stems from territories such as Germany and the Netherlands, though France and Spain are beginning to follow suit. Croatia s postal service report annual savings per vehicle at around ‘ 920. After the replacement of all 180 motor scooters with e-bikes, it is estimated that the overall cost savings will be approximately 85%, while CO2 emissions will be lower by 100 tonnes annually.
PPPC-nominated members of the Guyana Elections Commission (left to right) Sase Gunraj, Robeson Benn and Bibi Shadick. The Guyana Elections Commission (GECOM) has decided to probe the procurement of US$500,000 worth of ballot papers and other sensitive material for the upcoming Local Government Elections (LGE) but the Chairman of that elections management authority, Dr. Steve Surujbally said it is too early to speak about a forensic audit. People s Progressive Party Civic (PPP)-nominated GECOM Commissioner, Bibi Shadick told a news conference that the seven-member Commission has agreed to conduct a probe after the March 18, 2016 Local Government Elections. We have taken a decision, all six commissioners without exception The six commissioners have agreed that this particular procurement of ballot papers and materials for this year and the whole process of when it started to when it arrived , she told a news conference.
Dr. Surujbally shied away from saying investigation but he disclosed that steps would be taken to inquire what transpired from those concerned. Investigation is a strong word, the first thing one would want to do and that is what we have agreed on is that all the parties that are involved in this thing, let s interview them, let s call them and let s see what is this all about so that s the first step before you go into some audit, he said. He said at this point in time there has been no decision to conduct a forensic audit but it might evolve into that, who knows. Among those to be questioned are the two GECOM Commissioners and Information Technology expert who travelled to Canada to oversee the process for the ballot papers and other items
Shadick said observations of the arrival of the ballot papers, statements of poll and tally sheets at the Cheddi Jagan International Airport (CJIA) on Tuesday, March 1, 2016 from Canada and pictures taken there would be included in the report that would be sent to the forensic auditors. Shadick explained that a full investigation would be conducted by taking statements from all the parties involved in the procurement process, questions from the Commissioners and the finalizing of a forensic audit of the entire process would be undertaken. She said the cost and manner of the procurement of the ballot papers and other sensitive material was a matter of concern to all the commissioners.
The PPPC-nominated commissioners said GECOM has no proper procurement process including the advertising for products and services, resulting in huge sums of monies being spent without any formal agreement or documentation. There seems to be no rules being followed the instrument that would cause an accountant to pay money has to be a contract not an invoice that turns up and services have to be procured in a proper way, she said. With GECOM now being a budget agency that is allowed to draw down funds directly from the Consolidated Fund, she said there would now be greater scrutiny of accountability procedures. Shadick noted that the Chief Elections Officer authorized to spend up to GYD$250,000 at any one time after which he should seek approval from the Commission. However, she said GECOM paid a Canadian company US$500,000 for the ballot papers and other sensitive material and more than GYD$6 million to a lawyer without the Commission s approval. The PPPC Commissioners said in the end GECOM forked out 25 percent more than the estimated cost and that other freight had accompanied the ballot papers in the grossly oversized aircraft that the Commission paid for.
The PPPC- nominated Commissioners said that even after Commissioners had identified arrangements for printing and logistics to be treated separately, they were presented with full invoicing from a party which seemingly inserted itself into the process- the very party about whim grave reservations were held with respect to past and procurements at the very start of the process. It appears as if disparate communications were undertaken seemingly with the express intent of undermining and thwarting the Commissioners goal of achieving the timely, transparent, cost effective sourcing and delivery of print materials for the LGE, the PPPC Commissioners said.